Financial Industry Alert

This past Thursday, September 22, a federal district court in the Central District of California dismissed an action raising usury claims against several student loan servicers, rejecting the plaintiffs' arguments based on the "true lender" doctrine. The decision comes on the heels of a decision by another judge of the Central District of California in U.S. Consumer Financial Protection Bureau v. CashCall, Inc. (covered here), which relied on the true lender doctrine to rule in favor of plaintiff CFPB. The two cases illustrate contrasting approaches to the application of true lender doctrine to marketplace lending models.

The plaintiffs in Beechum v. Navient Solutions, Inc. obtained student loans from Stillwater National Bank and Trust Company. Stillwater then sold those loans, pursuant to contractual agreements, to defendant loan servicers, who then collected interest at a rate above California's 10% usury cap. The plaintiffs sued the servicers for violating California State usury law, but the servicers moved to dismiss, arguing that California law contains a usury exemption for any loan made by a National Bank like Stillwater. The plaintiffs responded that the exemption should not apply because the non-bank servicers, rather than Stillwater, were the "true lenders" in the loan transactions. According to their complaint, although Stillwater was the nominal lender, the servicers "originated, underwrote, funded and bore the risk of loss as to the loans."

The court rejected the plaintiffs' true lender argument. Applying California law, it acknowledged that in some contexts courts had looked beyond the form of a loan transaction to determine whether the substance suggested usurious intent. But it found that none of these cases had applied the doctrine where an explicit usury exemption, like the one for banks under the California Constitution, was at issue. By contrast, two California State cases had found that where a loan transaction, on its face, is entitled to an explicit usury exemption, courts do not look behind the transaction to scrutinize which party is the true lender. The court found these holdings controlling and dismissed the case.

Although the decision is a narrow one based on California State law, it adds yet another data point to the growing body of law on the true lender doctrine. The court's analysis is potentially noteworthy for several reasons:

The court's focus on the face of the transaction is a departure from cases like CFPB v. CashCall, which have, in similar contexts, applied a "predominant economic interest" test to scrutinize a transaction.

The defendant servicers argued that the court should dismiss the complaint on the alternative ground that application of State usury law to loans originated by Stillwater would run afoul of federal preemption under the National Bank Act. Because the court dismissed on the ground of a State law usury exemption, however, it did not reach the federal preemption issue. This may signal reluctance to wade into thorny preemption issues created by the Second Circuit's May 2015 decision in Madden v. Midland Funding, LLC.

Although the court does not explicitly mention the principle that a loan valid when made cannot become usurious as a result of a subsequent transfer, the result in the case adds to the body of case law standing for that proposition.

The plaintiffs may elect to pursue an appeal to the Ninth Circuit. We will monitor the case and provide updates as appropriate.

Bob Loeb is a partner in Orrick's
Supreme Court and Appellate Litigation practice, specializing in high stakes
and complex cases. He has briefed hundreds of cases and has personally argued
more than 185 appeals, including cases in the U.S. Supreme Court, every federal
circuit and numerous state courts.

His breadth and depth of
appellate experience and track record of success in high-stakes matters
are why clients, including top financial institutions and tech and energy
companies, trust Bob with their most important cases.

In April 2019, Bob argued to the U.S. Supreme Court in Food Marketing Inst. v. Argus Leader Media,
regarding Exemption 4 of the Freedom of Information Act, which permits the
government to withhold “confidential” private-sector “commercial or financial
information” within the government’s possession. In January 2019, Bob argued
and won a billion-dollar case for a leading financial institution in New York’s
highest court. In 2018, he argued to the U.S. Supreme Court in Byrd v. US,
regarding the application of the Fourth Amendment to rental cars, and won a 9-0
victory. In July 2018, Bob also won a Second Circuit appeal on an important,
multi-million-dollar case regarding email phishing. Bob is also a leader on
fintech issues, regularly advising fintech lending platforms, banks, and
investors.

Before joining Orrick, Bob served as one of the leaders of
an elite appellate group at the Department of Justice. There, in addition to
major national security, commercial, and administrative law, Bob supervised
bankruptcy appeals. At Orrick, Bob has continued to handle big ticket
bankruptcy matters, such as a billion-dollar dispute over whether DHL’s claim
was discharged by United’s bankruptcy, appeals from the City of Stockton
bankruptcy confirmation, and a Ninth Circuit matter involving the interplay of
the Takings Clause and bankruptcy law.

Howard Altarescu advises bank and non-bank financial
institutions and governmental agencies in connection with innovative capital
markets, debt financing and other transactions, as well as on the implications
of financial markets regulation. Howard
also co-heads the firm's Fintech team, which is focused on serving a wide array
of fintech platforms and other businesses. Howard has previously served as
Orrick's Finance Sector Leader, responsible for implementing the firm's
strategy to provide distinctive transactional, litigation and regulatory
services to financial institution clients globally, as well as co-head of the
firm’s Finance Business Unit. In these roles, Howard has a broad strategic,
advisory and business development role at the firm, drawing on many years of
experience, both in law firms and as a banker helping clients develop
innovative financial solutions to meet their objectives.

Most recently, Howard has worked on securitizations
and other structured financings backed by marketplace loans and has advised
numerous clients on the implications of the Madden v. Midland Funding case, the
OCC "fintech charter" and related legal issues. Howard has also recently worked on a number
of groundbreaking mortgage credit risk transfer transactions between Fannie Mae
and major banks and other clients.

Practice:

A Senior Associate in the Supreme Court and Appellate
Group, Chris's practice focuses on high-stakes appeals and cutting-edge legal issues.

Chris has a deep passion for
intellectual property law, and he specializes in complex copyright and
trademark issues arising at the intersection of business and technology. He has
represented major tech developers, biomedical manufacturers, and content
creators on a wide range of critically important issues. In particular, Chris has
litigated cutting-edge issues of personal jurisdiction, extraterritoriality, and damages;
the trademark law’s trade dress, functionality, dilution, and nominative fair
use doctrines; and the daunting copyright questions that confront technology
providers and platforms in the digital age. Chris also has a wealth of
experience counseling Fintech clients on novel issues confronting that
industry. And he has represented clients in appeals involving trade secrets,
class action litigation, bankruptcy, telecommunications, constitutional law,
and more. He has authored merits briefs and cert. petitions in the U.S. Supreme
Court, as well as dozens of briefs in federal and state courts of appeals. And he has
represented clients in trial courts, crafting dispositive motions, witness
declarations, evidentiary objections, and jury instructions.

Chris also maintains an active pro bono practice. He won an
appeal in the Ninth Circuit on behalf of a client seeking
immigration relief, and currently represents clients on issues ranging from
copyright’s willfulness doctrine, to freedom of information laws, to New York
state’s parole system. Chris is also an active member of the bar, sitting on
the Federal Bar Council’s Public Service Committee.

Prior to joining Orrick, Chris was a law clerk to Judge
Robert D. Sack of the U.S. Court of Appeals for the Second Circuit and Chief
Judge Carol B. Amon of the U.S. District Court for the Eastern District of New
York.

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